Jeremy Hunt’s new childcare plans have sparked concern, especially for parents approaching the £100,000 income mark. This threshold signifies a significant loss of childcare support under the government’s free childcare hours scheme. While Hunt’s expansion of the 30 free hours scheme seems promising for parents of two pre-school children, breaching the £100,000 threshold results in the forfeiture of both tax-free childcare and free childcare hours.
Parents in high-cost childcare areas, such as inner London, are the hardest hit. They stand to lose up to £23,300 in free childcare hours annually, in addition to tax-free childcare benefits worth up to £2,000 per child. This translates to an immediate loss of £27,300 in benefits when a parent’s income surpasses £100,000.
Recovering from this loss requires a substantial increase in income, typically around £156,279. This situation leaves parents in a disadvantageous position between £100,000 and £156,000.
To counteract this, parents can explore a solution known as Salary Exchange for workplace pensions (aka Salary Sacrifice). This method allows them to reduce their taxable income while still maintaining access to government childcare support through the free childcare hours scheme. Here’s how it works:
Salary Exchange involves diverting a portion of your gross salary directly into your workplace pension scheme. This contribution is made before income tax and National Insurance contributions are deducted, effectively reducing your taxable income.
By adjusting your pension contributions, you can bring your earnings below the £100,000 threshold, thereby preserving your eligibility for tax-free childcare and free childcare hours. This means that even with a salary increase, you can still access these crucial benefits for your family. This would also help reduce the tax bill due to the personal allowance. You can learn more in this article.
In summary, while the government’s childcare plans present challenges for parents nearing the £100,000 earnings threshold, Salary Exchange offers a practical way to manage your income and continue receiving childcare support. By reducing your taxable income through pension contributions, you can maintain access to the valuable benefits provided by the free childcare hours scheme, ensuring that your family’s needs are met without encountering a sudden earnings cliff-edge.
If your employer is not offering this benefit, Husky can help them as we make the implementation and management. Our team can efficiently resolve any issues on your behalf.
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